International Journal of Economics,

Commerce and Research (IJECR)

ISSN (P): 2250-0006; ISSN (E): 2319-4472
Vol. 8, Issue 2, Apr 2018, 23-30
© TJPRC Pvt. Ltd

PROFITABILITY DETERMINANT OF CONVENTIONAL COMMERCIAL

BANKS USING CREDIT RISK AS A MODERATING VARIABLE

WIDYA PUSPA ANDIKA, ISTI FADAH & NOVI PUSPITASARI

University of Jember, Indonesia
ABSTRACT

This research aimed to analyze the influence of CAR, LDR and BOPO partially on profitability (NIM) and to
analyze NPL as a moderating variable in relation between CAR with NIM, LDR with NIM, and BOPO with NIM.
The population of this research is the Conventional Commercial Bank in Indonesia. The sampling method used is
saturation sampling, taken from Conventional Commercial Bank listed on OJK. This research was conducted during
the period of 2012-2015 and selected as many as 96 Conventional Commercial Banks that became a sample research.
The research data analysis methodology used is, multiple linear regression analysis and moderated regression analysis
(MRA) with residual test. The results of multiple linear regression analysis showed that partially, CAR, LDR and BOPO
significantly influenced the profitability (NIM) and they had negative relations with the net interest margin (NIM). The
results of the moderated regression analysis (MRA) with residual test showed that NPL is able to moderate influence of

Original Article
CAR, LDR, and BOPO on the profitability (NIM).

KEYWORDS: Profitability, Credit Risk, NIM, CAR, LDR, BOPO & NPL

Received: Jan 04, 2018; Accepted: Jan 24, 2018; Published: Mar 03, 2018; Paper Id.: IJECRAPR20182

INTRODUCTION

Profitability gave the information on how efficient a bank in carrying out its business activities.
According to the regulations of Bank Indonesia number: 6/10/pbi/2004 ratio of profitability or commonly called
earning ratios consist of Return on Assets (ROA), Return on Equity (ROE), the Net Interest Margin (NIM), and
operational costs to operating income (BOPO). The development of profitability ratio of Commercial Bank
especially Conventional Commercial Bank that is measured by NIM showed that there is a rise in 2015 compared
to the previous three-year decline respectively. According to Banking Statistics Indonesia data in 2012, the ratio of
Conventional commercial banks NIM experienced a decline over the previous year, from 5.67% to 5.49%, then
2013 dropped to 4.89%, and then 2014 to 4.23%. The ratio of NIM experienced an increase in 2015 to 5.39%. It is
interesting to do research on the factors that affect the profitability of Conventional Commercial Banks that is
measured by NIM.

This study tested the influence of internal factors such as Capital Adequacy Ratio (CAR), Loan to Deposit
Ratio (LDR), and operating expenses to operating income (BOPO) on the profitability that is measured by Net
Interest Margin (NIM). Research on the influence of CAR, LDR and BOPO to NIM has been done by previous
researchers. The Research of Cindy et al. (2016) stated that CAR positively and significantly affected the
profitability (NIM), whereas Raharjo (2014) stated that the CAR does not significantly negatively impact NIM.
The research of Hidayat et al. (2012) and Raharjo (2014) stated that the LDR have significant positive effects to
NIM. Satriawan (2015) stated that LDR have a negative impact on profitability (NIM). Dumicic and Ridzac (2012)

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24 Widya Puspa Andika, Isti Fadah & Novi Puspitasari

shows the cost to income ratio that measures the efficiency of the bank (BOPO) have negative correlation with NIM.
Different research results by Raharjo (2014) stating that the positive effect BOPO significantly to NIM.

Some of the results of such research showed that there is an inconsistent state giving rise to the alleged existence
of a variable that moderate the relationship between variables CAR with NIM, LDR with NIM, and BOPO with NIM.
The variable that suspected moderating is a Non Performing Loan (NPL) it’s related to credit risk. The high NPL can affect
the ratio of capital, which is reflected through the CAR, because the bank must bear the risk of channelling credit/earning
assets, a high NPL has also had an impact on the distribution of credit which is reflected through the LDR, and resulted in
the banks bear the costs. This research uses the NPL as the moderator variable due to the influence of the NPL to CAR,
LDR and BOPO allegedly will have an impact on its effect on profitability (NIM). Some researchers doing research on the
NPL as moderating variables in the relationship between CAR, LDR, and BOPO with profitability, but most researchers
use ROA as the proxy of profitability. Researchers who examined the NPL as a moderating variable and using NIM as a
proxy of profitability is Utami and Putra (2016), that results showed that the NPL affect negatively to relationship LDR
with NIM.

Based on the matters outlined above as well as the results of previous studies of mutual contradictions, the author
is interested in doing further research on factors that affect the profitability of banks with NPL ratio as moderating variable.
The outline of the research problems are: (1) Are the CAR, LDR, and BOPOpartially influential significant to NIM on
Conventional Commercial Banks in Indonesia? (2) Does the NPL moderate the influence of CAR against NIM on
Conventional Commercial Banks in Indonesia? (3) Does the NPL moderate the influence of LDR against NIM on
Conventional Commercial Banks in Indonesia? (4) Does the NPL moderate the influence of BOPO against NIM on
Conventional Commercial Banks in Indonesia?

This research aimed to: (1) Analyze the influence of CAR, LDRand BOPO partially against NIM on Conventional
Commercial Banks in Indonesia, (2) Analyze the NPL as a moderating variable on the influence of CAR against NIM on
Conventional Commercial Banks in Indonesia, (3) Analyze the NPL as a moderating variable on the influence of LDR
against NIM on Conventional Commercial Banks in Indonesia, (4) Analyze the NPL as a moderating variable on the
influence of BOPO against NIM on Conventional Commercial Banks in Indonesia.

As for the hypothesis presented in this study are as follows:

H1: CAR, LDR, and BOPOpartially influential significant to NIM

H2: NPL significantly moderate the influence of CAR against NIM

H3: NPL significantly moderate the influence of LDR against NIM

H4: NPL significantly moderate the influence of BOPO against NIM

RESEARCH METHODS

This research is a quantitative approach, aimed to test a theory or hypothesis in order to strengthen or decline
theory or hypothesis of the research that's already there. Presentation of data used the pooling data, it is a combination of
cross section and time series data. This study used secondary data in the form of financial statement's publication.
Conventional Commercial Bank in the period 2012-2015 which is accessible via the official website of the Otoritas Jasa
Keuangan (OJK). The population in this research is the Conventional Commercial Banks are there in Indonesia. The

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Profitability Determinant of Conventional Commercial 25
Banks using Credit Risk As a Moderating Variable

technique of determination of sampling is a saturated sampling or census. Samples were entirely taken from Conventional
commercial banks registered in OJK, while the relation between variables of this research are shown by the following
framework:

Figure 1: The Framework of Thie Research

Multiple Linear regression analysis in this research is used to find out how big the influence of variable CAR,
LDR, and BOPO to profitability that is measured by NIM. This analysis technique is used, because researcher wants to
analyze the relationship between the independent variable toward the dependent variable first before doing the regression
analysis with moderating variable. The regression model used in this study is:

NIM = a + b1CAR + b2LDR + b3BOPO + e

Moderated regression analysis with the residual test is used to testing the NPL as a moderating variable on the
influence of each independent variable (CAR, LDR, and BOPO) to the dependent variable (NIM). Residual analysis wants
to test the influence of deviation (deviation) of a model. The focus is the incompatibility (lack of fit) deviation resulting
from the linear relationship between the independent variables. Lack of fit is shown by the value of the residual in the
regression (Ghozali, 2007:171). The regression model with the residual approach used in this study is as follows:

a. Regression Model CAR to NIM with the moderating variable NPL:

• NPL = a0 + a1CAR + e

• │e│ = b0 + b1NIM

b. Regression Model LDR to NIM with the moderating variable NPL:

• NPL = c0 + c1 LDR + e

• │e│ = d0 + d1 NIM

c. Regression Model BOPO to NIM with the moderating variable NPL:

• NPL = e0 + e1 BOPO + e

• │e│ = f0 + f1NIM

THE RESULTS OF DATA ANALYSIS

The results of the regression analysis that tested the CAR, LDR, and BOPO to profitability (NIM) are as follows:

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26 Widya Puspa Andika, Isti Fadah & Novi Puspitasari

Table 1: Multiple Linear Regression Analysis Results

Variables Coefficient T Sig.
Constant 11.929 19.370 0.000
CAR -0.019 -2.901 0.004
LDR -0.008 -3.844 0.000
BOPO -0.062 -9.722 0.000
R Square = 0.230 Adjusted R Square = 0.224
F = 37.836 Sig. = 0.000
Source: SPSS Output 21 (data processed)

Based on table 1, regression equation (relating the the independent variable CAR, LDR, and BOPO to dependent
variables NIM) is as follows:

NIM = 11.929 – 0.019 CAR– 0.008 LDR– 0.062 BOPO

That equation can be explained that the constants of 11.929 refers to a level of profitability (NIM) when the
independent variable i.e. CAR, LDR, and BOPO is zero. The regression coefficient -0.019 stated that any increase in CAR
of 1 percent will lower the level of 0.019 NIM percent assuming the other variables to be constant. The regression
coefficient of -0.008 stated that any increase in LDR of 1 percent will lower the level of NIM of 0.008 percent assuming
the other variables considered to be constant. As well as regression Coefficients of -0.062 stated that any increase in the
amount of 1 percent of BOPO will lower the level of profitability of 0.062 percent assuming the other variables considered
to be constant.

The results of the regression analysis with the residual test that tests the NPL as moderating variables against the
influence of CAR, LDR, and BOPO to NIM is as follows:

Table 2: Residual Test Results the NPL as Moderating Variables

NPL as
Moderating Information Coefficient T Sig.
Variables to
CAR with (Constant) 1.890 9.493 0.000
NIM NIM -0.094 -2.779 0.006
LDR with (Constant) 2.010 9.974 0.000
NIM NIM -0.108 -3.166 0.002
BOPO with (Constant) 1.825 10.070 0.000
NIM NIM -0.087 -2.817 0.005
Source: SPSS Output 21 (data processed)

Based on table 2, regression equation obtained the NPL as moderating variables CAR with NIM is │ e │ = 1.890
– 0.094 NIM. The regression equation of the NPL as moderating variables LDR with NIM is │ e │ = 2.010 – 0.108 NIM.
The regression equation of the NPL as moderating variables BOPO with NIM is │ e │ = 1.825 – 0.087 NIM. The value of
the coefficient of regression testing parameters variable the NPL as variables that moderate the relationship CAR, LDR and
BOPO with NIM is negative and significant. It showed that the NPL is a moderating variable to the relationship between
CAR with NIM, LDR with NIM, and BOPO with NIM.

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Profitability Determinant of Conventional Commercial 27
Banks using Credit Risk As a Moderating Variable

DISCUSSIONS
The Influence of Capital Adequacy Ratio (CAR) to Net Interest Margin (NIM)

The test results against variable CAR showed that the CAR was negative and having significant effect against
NIM with a p value 0.004 smaller than α (0.05). This happens, because the chances of the bank being able to raise the ratio
of CAR or own capital, but not passed on in the form of credit optimally, so interest income obtained small banks and led
to a low ratio of NIM. Increased CAR not capable of boosting the ratio of NIM. This can be caused because the bank is
difficult in the optimum marketing strategy to channel credit, risk while funneling funds in the form of a credit, and
competition between banks. In addition, with the amount of capital of the banks tend to invest their funds with care and
choose to do other investments that have a smaller risk than funneling those funds in the form of credit, so that the CAR
the rise could not afford to boost the ratio of NIM. Other investments which are done for example, the bank invested in
capital markets by buying stocks or bonds

The results of this research are not in accordance with the concept that states that the higher the CAR, then
stronger the ability of the bank to bear the risk of any credit/earning assets are at risk and be able to finance the operations
of the bank, so that it will be a considerable contribution to profitability (Kuncoro and Suhardjono (2002:573). The results
of this research also do not correspond to the results of research Cindy et al. (2016) and Leykun (2016) stating that a CAR
influence positive and significantly to NIM.

The Influence of the Loan to Deposit Ratio (LDR) to Net Interest Margin (NIM)

Test results about the influence of LDR against NIM pointed out that negative and significant, influential LDR
against NIM with p value 0.000 is smaller than α (0.05). Interpretation of the results of this study is the higher level of the
distribution of credit, then the NIM will be increasingly low. This can occur due to the high level of channeling credit by
banks. Of course, this will affect the interest income received by the bank, thus lowering the value of the NIM. The bank
should be careful with an increase in the number of loans disbursed, given an increased amount of credit disbursed is a
great achievement for the bank when it has been processed in accordance with the terms and conditions. It is very
important to avoid an increase in bad debts due to the increased amount of the credit.

The results of this research are not in accordance with the research Hidayat et al. (2012) and Raharjo (2014)
stating that the LDR positive effect significantly to NIM. According to Raharjo (2014) increase in LDR increase loans
larger than the increase in deposits that were successfully compiled by the bank. This indicates that the increase in the
bank's interest income is larger when compared with the increase in interest expense should paid by the banks, it will be
raising the net interest margin of the bank (NIM).

The Influence of Operating Expenses to Operating Income (BOPO) to Net Interest Margin (NIM)

The test results against variable BOPO indicates that a negative and significant effect BOPO against NIM with p
value 0.000 smaller than α (0.05). Interpretation of these results is the greater of the ratio BOPO, the smaller level ratio
NIM or it can be said the bank's financial performance will decrease. This is due to the large value of BOPO shows that
there is an increase in operating costs compared to the operating income, so it can be affected by a decline in profits that
accrue to the bank. One of the acquired bank's operating income is the interest of the customer, while the operational cost
is the cost of interest from third parties. The bank earned interest income would be much better if the cost of the interest are
much smaller, but to get the cost of a small interest, the bank must be good at selecting a third party. In general, the parties

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28 Widya Puspa Andika, Isti Fadah & Novi Puspitasari

who provide funds at the bank have claimed to ask for a higher interest rate. The high interest rates that are desired by the
third party caused the bank become more critical in terms of interest rates that are charged to customers. To get a great
operating income, the bank should also be good at looking for, the customer and the bank can press a more minimal
interest fee again. The results of this study are consistent with research conducted by Dumicic and Ridzac (2012) that
shows the cost to income ratio that measures the efficiency of the bank had a negative correlation with net interest margin
(NIM).

Non Performing Loan (NPL) as a Moderating Variable on the Influence of

Capital Adequacy Ratio (CAR) to Net Interest Margin (NIM)

The test results against a NPL variable indicating that the NPL is moderating variable to relationship CAR with
NIM, or it can be inferred that the NPL to moderate the influence of CAR against NIM conventional commercial Bank in
Indonesia. During the research period the average value of Conventional commercial banks amounting to CAR 23.06% or
above the minimum limit prescribed by Bank Indonesia. The high CAR shows the better capabilities of the bank to bear the
risk of any credit/earning assets are risky, so the bank was able to finance its operational activities as well as provide a
considerable contribution to profitability. On the other hand, the high CAR can reduce the ability of the bank in expanding
its business. This will affect the interest income received by the bank or NIM will decline.

The results of this study in accordance with the theory that states that the higher the CAR, then the stronger ability
of the bank to bear the risk of any credit/earning assets are at risk and be able to finance the operations of the bank, so that
it will give a considerable contribution to the profitability of Kuncoro and Suhardjono (2002:573). This research supports
the research of Negara and Sujana (2014) stating that NPL has a negative effect to the relationship of the CAR with
profitability. But the difference is the proxy of profitability used in that study is ROA, while this research use the proxy
NIM as profitability.

Non Performing Loan (NPL) as a Moderating Variable on the influence of the

Loan to Deposit Ratio (LDR) to Net Interest Margin (NIM)

The test results against moderating variable NPL showed that the NPL is a moderating variable to relationship
LDR with NIM, or it can be inferred that NPL is to moderate the influence of LDR against NIM conventional commercial
Bank in Indonesia. Non performing loan factor that meassured with the NPL ratio is certainly not going to be separated
from the main activity of banks in the conduct of its business in the form of the distribution of credit, so that it can affect
the margin of bank. Conventional commercial banks during the period 2012-2015 have average value ratio LDR of 98.19%
which means that the distribution of the bank credit is high enough. However, the high degree of credit distribution if not
right on target may pose risk of nonperforming loans is bigger, so it will affect the interest income received. The incidence
of bad debts as a result of the credit channeling less effective will affect the magnitude of the net interest margin (NIM).

The results of this research are consistent with the results of research of Utami and Putra (2016) in the fact - NPL
has a negative effect on the relationship of LDR and profitability (NIM). Utami and Putra (2016) explained that incidence
of non performing loan will result in the loss of the bank, because the funds disbursed by the bank in the form of credit is
not returned or interest income that cannot be accepted so that the profitability of the bank will be decreased. Besides the
increase in NPL ratio will also have an effect on decreasing public confidence as well as the health of the bank.

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Profitability Determinant of Conventional Commercial 29
Banks using Credit Risk As a Moderating Variable

Non Performing Loan (NPL) as a Moderating Variable on the Influence of Operating

Expenses to Operating Income (BOPO) against Net Interest Margin (NIM)

The results of testing variables moderating the NPL have showed that the NPL is moderating variable of the
relationship BOPO with NIM, or it can be inferred that the NPL moderated influence of the BOPO against NIM
conventional commercial Bank in Indonesia. Bad debt, indicated by the NPL can be increased on the expenses effect from
an increase in the expenses of backup earning assets or other expenses, so the increase in NPL can interfere with the
performance of the bank. The average ratio of BOPO Conventional commercial banks during the research period is 83.37%
or large enough, so that it can be said that the bank has not been efficient in suppressing its operational costs. This can be
caused, because the bank is too cautious against risks that will occur, so the banks back up their funds for the loss of
productive assets that will occur and lead to increased operating expenses, as well as the income that will be accepted will
also decrease.

The results of this study are inconsistent with research Dewi and Budiasih (2016) stating that the NPL is not able
to moderate the influence of BOPO on profitability. Dewi and Budiasih (2016) explains in his research that credit quality
(NPL) is not moderating influence of BOPO on profitability and it can be caused by the existence of other internal or
external factors that further influence BOPO such as third-party funds. Increased third-party funds will have an impact on
increasing the interest expense that must be paid so that it will lead to an increase in the ratio of BOPO.

CONCLUSIONS

Based on the results of research and discussion about the influence of CAR, LDR and BOPO to profitability that
is measured by NIM on Conventional Commercial Bank in period 2012-2015, as well as analyzing the NPL as moderating
variables of relationship between CAR with NIM, LDR with NIM and BOPO with NIM of Conventional Commercial
Bank in period 2012-2015, it can be drawn that partially CAR, LDR and BOPO are significant and has a negative relation
with NIM. The results of residual analysis showed that the NPL is able to moderate the influence of CAR against NIM, the
influence of LDR against NIM, and the influence of BOPO against NIM.

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